Huge NYT Exposé Reveals Why The Fiscal Timebomb Will Explode Next Year

Nobody wants much to think about it yet, but it's well understood
by everyone in Washington and on Wall Street, that a potentially
massive fiscal problem is looming for the economy next year.

The issue is divided into three parts:

Sometime in late 2012 or early 2013, Congress will have to
approve another debt ceiling hike.

At the same time, all of the Bush tax cuts are set to expire
-- not just the tax cuts for the rich.

Thanks to the last debt ceiling deal, some big time spending
cuts are due to go into effect starting in 2013. In theory, these
could be reversed by Congress, but in the context of everything
else it will be challenging.

Trying to figure out how it will shake down is especially
difficult since it's an election year.

But in the worst case scenario we could have bracing austerity
(tax hikes and spending cuts) coupled with another heart-stopping
debt ceiling fight. Or we could have some kind of reversal of the
spending cuts and a debt ceiling fight, and perhaps another
downgrade from ratings agencies, another potential confidence
blast.

Just in terms of the drag on growth, recent analysis by Barclays
(according
to BW) puts the hit at around 3% of GDP.

Furthermore, whereas in the last debt ceiling fight, Obama was
eager to ensure that there would be no cuts in 2012 (an election
year), it's not clear that he'd make the same bet this time, as a
lame duck (if he wins, or even just in the lame duck session), as
he's apparently open to the idea of seeing all the Bush tax cuts
expire on everyone.

All this was already known.

You'll probably feel even worse about things after you read the
latest cover story by Matt Bai in The New York Times Magazine on
the failure of Obama and Boehner to strike a "Grand Bargain" in
the summer of 2010.

It's a very long, and detailed story, but one key point is that
yes, Obama and Boehner, for whatever reason, did think they could
work with each other, and were tantalizingly close at times to a
real deal. Obama was willing to concede on spending and
entitlements, and Boehner was actually willing to concede on
raising revenue, a decision that could prompt a revolt within a
GOP that had just been swept to power with the exact opposite
mandate.

What's also clear is that all the cliches about Boehner not
really being in command of his ship, and Eric Cantor wanting to
undermine him seem to be true.

For example, in describing the negotiations, Bai writes:

Like much of Washington, White House aides were perplexed by the
relationship between Boehner and the man who was 14 years younger
and next in line for his job, Eric Cantor. During one of a series of tense White
House meetings with Congressional leaders in July, Obama’s aides
had been stunned — even a little embarrassed — to see Cantor,
when asked for his opinion, directly contradict the speaker in
front of the president. He insisted that the
caucus would not accept the kind of sweeping deal that both
leaders wanted. It struck Obama’s aides as breach of Washington
decorum, and it appeared to betray deeper divisions inside the
Republican caucus. When Daley and Geithner were first invited by
Boehner to his Capitol office to restart the negotiations in
mid-July, they were surprised to find Cantor there too. It was
one of the main reasons that the White House dared to hope a deal
might work. They assumed that Cantor’s presence meant that the
two Republican leaders were now speaking with the same voice.

However, what's really worrisome is that chastened by the events
of the debt ceiling debacle, nobody seems to have any hope that
DC is going to have a better go of it this time around.

Now, with another debt battle looming, the chance of resurrecting
some kind of grand bargain doesn’t seem very promising. Obama and
Boehner have spoken only a handful of times. The administration’s
most driven dealmaker, Bill Daley, never recovered from the
episode, which poisoned his relationship with Harry Reid, who
blamed Daley for having kept him and other Senate leaders in the
dark as the negotiations unfolded. Daley resigned in January and
was replaced by Jack Lew — the guy whom Boehner and his aides
tried to sideline.

When I talked to Boehner about the two potential crises coming at
year’s end (the possibility of automatic budget cuts and, weeks
later, another vote on the debt ceiling), he told me he was
placing his hopes on getting a new president. “I don’t see any real evidence that
this president has the courage to lead,” he growled. He added
that any comprehensive deal might be even harder to sell to his
members this time around.

This is why, in the end, there's a good argument to be made that
a
Romney election would be much better for the economy, in that
in all likelihood, a unified GOP Washington would forget about
spending cuts and austerity, and quickly focusing on making sure
nothing bad happens to the economy, defusing the fiscal bomb by
punting.